Following the OECD global growth forecast downgrades a couple of weeks ago, we heard from the International Monetary Fund (IMF) and World Bank yesterday, and the warnings came thick and fast. The IMF’s new Chief (and former chief executive officer of the World Bank), Kristalina Georgieva, raised her concerns over the global economy’s “synchronised slowdown” citing trade tensions as the main culprit of “substantially weakened” manufacturing and investment activity globally, thus global growth is at “a near standstill”. Georgieva’s former colleague, David Malpass, the World Bank president noted that he expects global growth “to be even weaker” than the organisation’s previous growth estimate (in June), highlighting “Brexit, Europe’s recession and trade uncertainty” as the main drivers.
In a preview of the IMF’s research, due to be released next week, Georgieva noted that worldwide trade conflict could result in a $700bn (~0.8%) fall in global GDP by next year, adding, “In this scenario, the whole economy of Switzerland disappears,”. Of note was her estimate: “In 2019, we expect slower growth in nearly 90 percent of the world. The global economy is now in a synchronized slowdown. This means that growth this year will fall to its lowest rate since the beginning of the decade,”. So, quite a contrast from a couple years ago, before Trump waged his trade war against China (Europe, Japan, etc), where nations representing ~75% of global output were enjoying an upturn in their growth cycles. We look to next week’s IMF and World Bank annual meetings where we expect the global economic outlook to be downgraded further.
Meanwhile, recent headline data out of the US has pointed to a slowdown, with some calling for a recession to come sooner than most expect. September CPI releases tomorrow and retail sales prints next week will be monitored very closely by markets and we may see further knee-jerk reactions to the downside. Currently at historically high levels, our biggest concern is a fall in consumer confidence. According to the Conference Board’s global index, consumer confidence was at 107 in Q3’19, unchanged from the previous quarter and at a high level. It appears that so long as consumers’ jobs are not affected by the ensuing trade tensions, confidence will remain strong. However, there is a material gap between business and consumer confidence; the former has slid following trade concerns and a global manufacturing slowdown, so it is only a matter of time until we see a downturn in consumer confidence, thus subdued inflation concerns.
Also of note yesterday were Fed’s Chair Powell’s remarks that the central bank will resume its purchase of short-term US Treasuries in an attempt to expand the balance sheet and avoid recent repo market disruptions. He made it very clear that this does not constitute QE, rather it is for “management purposes”. Powell also appeared to reaffirm market expectations of a further rate cut by the end of the year; the futures market is currently pricing in an 83% chance of a rate cut at the meeting later this month. At this stage in the tightening cycle, we remain comfortable with our high-grade positions.